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Yum Brands Inc. (YUM), which thrives on budget diners at its Pizza Hut, KFC and Taco Bell chains, will increase menu prices this year in various parts of the world in response to rapidly rising food costs.
The pricing plan, which will be implemented in varying stages, follows on the company's strong fourth-quarter results posted Monday and positive 2012 outlook, instilling confidence among investors who may have been concerned about Yum's momentum given its high exposure to volatile emerging markets. The stock rose 2.75%, to $64.93 in Tuesday trading--marking a 10% rise so far this year.
Yum's restaurants in China--namely Pizza Hut Casual Dining and KFC--have the biggest impact on its overall business, helping increase its profits 30% in the fourth quarter. However, food and labor inflation are nibbling away at its China restaurant margins, which fell to 15.8% in the quarter from 18.2% the year before, despite menu price increases.
"We expect to make progress closing the gap between inflation and our menu pricing and to see positive year-over-year restaurant margins in the second half of 2012," Chief Financial Officer Rick Carucci said on a conference call with analysts Tuesday.
To help the company build its margins, Carucci said that in China, "we expect to take, obviously, some pricing in 2012; our best guess is sometime in the second quarter, but that's dependent upon how things play out a little bit." In regard to the rest of the world, he added, "I think similar to China, in the way that we'll probably take some modest pricing early in the year, and then sort of reassess depending on what commodities do later in the year."
Yum expects its food costs this year to rise 2% in the U.S., 6% in China, and 5% in its international division, excluding China, with inflation moderating in the second half of the year.
Yum's strategy over the past few years has been to reduce its exposure to highly penetrated or underperforming markets by selling restaurants to franchisees, and to increase its exposure to emerging and underpenetrated markets. "Today, over 70% of our operating profit is generated by international businesses," compared with just 30% 10 years ago, Carucci said.
The company plans to open 1,500 restaurants internationally this year, including 600 in China, which is similar to its 2011 expansion levels. Some analysts questioned Yum's ability to sustain such high growth again this year, but Chief Executive David Novak said Yum remains "very bullish about the development opportunities in China," given its continued growth of the consumer class. "Our goal is to keep this development engine primed and pumped and take advantage of the significant opportunity we have," he said.
Yum is also making a somewhat unexpected comeback in the U.S., with same-store sales growing at Pizza Hut last year, and growing this year at Taco Bell, the primary driver of its U.S. business. "Taco Bell has reversed its negative sales in the first quarter, and positive same-store sales trends continue as we speak," Novak said. This year, Yum expects Taco Bell's new breakfast menu, Doritos taco and restaurant renovations to drive sales growth, but each are dependent upon how soon franchisees are willing to invest in them.
-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; firstname.lastname@example.org